Sept 3. Put buyers in tens

–Yields jumped yesterday on a strong ISM number of 59.0 and robust Construction Spending.  Aside from mid-2011 this is the strongest ISM since 2004.  And it comes on a string of other powerful data, including last month’s 22% rise in Durables.  Of course that was mainly due to aircraft orders (which might actually show sustained growth as there are reports this morning that 11 commercial aircraft have gone missing from Tripoli’s overthrown airport).  In any case, 10 year yield rose 7.5 bps to nearly 242, and is higher yet this morning in front of today’s releases of ADP (223k expected) and Factory Orders of +10.9 exp.  Option activity was decisively bearish.  In dollars there was heavy put spread buying vs call selling.  In tens there was new buying of at least 15k TYV 124/125 put spreads (just through the upper strike this morning) and a new buyer of TYZ 123.5/124 put strip.  I generally like to see confirmation of a move with 1) heavy volume 2) an increase in implied vol, and 3) an increase in open interest.  Surprisingly, open interest was down in 5’s, 10’s and bonds, but the market definitely trades bearishly.
–Curve was just marginally steeper.  Dollar was much stronger with $/yen climbing above 105.  Crude plunged over $3; I  marked CLV at 9284 late, down 312 though still above August low of 9250.
–Now it’s all about the hiking schedule and whether rate increases can actually be sustained.  I saw a story that since the crisis, central banks that have tried to raise rates have already been forced to reverse course, including Finland, Norway, and New Zealand, and that high levels of global debt preclude funding rates of over 2%.  With the Fed making progress toward stated goals, some think the first Fed hike comes as early as spring.   The Fed assesses the market as expecting the first move in Q3.  I would split the difference and lean towards summer, but with the preponderance of geopolitical time bombs that could yet shock the economy, rate hikes are no sure thing.

Posted on September 3, 2014 at 5:31 am by alexmanzara · Permalink
In: Eurodollar Options

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